CRA says no unrelated retail activities for nonprofits

In a recent Canada Revenue
Agency document (CRA #2011-0394251I7), CRA was of the view that an
association that engages in a retail operation unrelated to its nonprofit
objectives was in fact operating with a profit purpose, and therefore does not
qualify as a nonprofit organization under paragraph 149(1)(1) of the Income
Tax Act.

Precedents for decision

Relying on the Supreme Court
of Canada decision in Woodward's Pension Society v. HMQ 62 DTC 1002 and Tourbec
(1979) Inc. v. The Minister of National Revenue, 88 DTC 1442, CRA was of
the view that the association was operating in a manner similar to the
organizations described in those two decisions. That is, it is operating for a
profit purpose rather than earning incidental profits in the course of
operating exclusively for a purpose other than profit.

"Incidental" profit OK

Based on the decision of the federal
court in Gull Bay Development Corporation v. HMQ, 84 DTC 6040, CRA
acknowledged that it is possible for an organization to earn a profit in the
course of meeting its not-for-profit objectives, and to use that profit in
support of those objectives. But the profit should be incidental and cannot
constitute a purpose of the organization. However, CRA was of the view that the
association in question was a for-profit enterprise, operating in direct
competition with taxable businesses, "within the guise" of a not-for-profit
organization.

CRA further indicated that the
"destination of funds" test has been rejected by courts for both charities and
not-for-profit organizations. It matters not that profit earning by a
corporation is for a very valid and legitimate cause. It only matters what the
purpose of the existence of the association is.

Lastly, CRA was asked to
comment on the application of The Canadian Bar Insurance Association v. The
Queen, 99 DTC 653 (TCC) decision to the association in question. In this
regard, CRA responded that the court accepted that CBIA did not have a profit
purpose on the basis that its involvement in commercial and investment
activities was directly connected to its not-for-profit objective of providing
insurance at cost to members (the nature of the organization as an insurer was
relevant).

However, CRA was of the view
that the organization in question was earning significant profits from
activities that are not directly connected to its not-for-profit objectives.

For a more detailed explanation, this technical interpretation
is available through commercial subscription services or a direct request to
CRA.

Theresa L.M. Man is a partner of Carters Professional Corporation and practices charity and
not-for-profit law in Carters' Orangeville office.
This article is reprinted with permission from Carters' Charity Law
Update, June 2011, http://www.carters.ca/charity/index.php